Martin Feldstein Calls for Large-Scale Public Intervention in the Housing Market...

He writes:

FT.com / Comment & analysis / Comment - Misleading growth statistics give false comfort: Macroeconomic Advisers... [estimates monthly GDP] using the same conceptual approach as the government uses for its quarterly estimates.... Its most recent estimates... show that real GDP rose from an annual $11,649bn [real 2000 dollars] last October to $11,701bn in December and $11,777bn in January but fell to $11,686bn in March, a decline of about $100bn in two months.... The misstatement that the economy expanded in the first quarter creates an inappropriately sanguine view of the months ahead....

Although the tax rebates now under way may provide some temporary help, the combination of falling real incomes, declining household wealth and a dramatic drop in consumer confidence suggests further falls in consumer spending and GDP. But the most serious risk is that the rapid fall in house prices – down more than 12 per cent in the past year and falling at a 25 per cent rate in the past three months – will raise the number of negative-equity mortgages, leading to widespread defaults and foreclosures.

Because US mortgages are “no-recourse”... individuals with negative equity have an incentive to default. There are now an estimated 8m negative-equity mortgages – more than 15 per cent of all outstanding mortgages.... A downward spiral in house prices would cause a fall in household wealth and in the capital of financial institutions, potentially resulting in a deeper and longer recession than any seen in the past several decades.

Now is the time for policy action to forestall such a house price collapse. There is nothing more the Federal Reserve can do by lowering short-term interest rates or by creating new credit facilities.... What is missing is action to prevent positive-equity mortgages from becoming negative-equity mortgages. The federal government could achieve that by providing low-interest loans with full recourse that would allow any homeowner to pay down a significant fraction of his mortgage. Homeowners would be in effect giving up the potential to default on their mortgage loans in exchange for lower interest costs...

Different from the more typical proposal these days of having the Federal government guarantee private mortgages (in exchange for warrants on the upside), but different in ways that I suspect are minor...

Comments

[Matt]

Marty, Bring me some investors and I will sign on. Get four or five large investors who can put up 20%.

We are working with parameters that we do not know, your expertise is public financing and this is mostly a private matter. Bring on some private investors who have a vested interest in the outcome, and I will be much more comfortable.

[Charlie Dodgson]

It would also be interesting to know the differences between this Feldstein plan and the one that Tanta panned at Calculated Risk:

http://calculatedrisk.blogspot.com/2008/03/feldman-plan-just-get-yourself-latte.html

[a]

"A downward spiral in house prices would cause a fall in household wealth and in the capital of financial institutions." That household wealth should never have existed in the first place. It was false, unreal. So Feldstein wants us to continue to live in make-believe land, as if that could possibly solve our problems.

The problem is not asset prices. The problem is the real economy. Pretending a little longer that Santa Claus exists isn't going to help.

[kharris]

a is correct that Feldstein's goal is to manipulate a major input to housing prices with the goal of manipulating prices themselves. That is very clear.

The issues that policy makers face are: 1) whether the cost in terms of money at risk and moral hazard engendered is greater than the cost of doing nothing and; 2) whether those who find this particular manipulation by government particularly egregious will have sufficient clout to do more harm to policy-makers' careers than those who are demanding that the government heal the wound that it has facilitated through slack regulation and friendly legislation. I can only guess at the answers, but in both cases, I think policy makers will lean toward manipulation.

[bmz]

Feldstein is wrong--the majority of U.S. mortgages are recourse.

[bmz]

Feldstein is wrong--the majority of U.S. mortgages are recourse.

[Robert Baker]

Most mortage loans are probably "recourse" de jure, but probably not de facto. To persue a borrower who walks out on a mortgage the lender must go to court and secure a deficiency judgment, and as Felix Salmon stated on Porfolio.com there are various reasons why that may not be worthwhile: 1) it may cost more to get a court judgment than the borrower has in assets; 2) judicial forcloseure proceedings allow the borrower to posit any fraud that may have occured at origination of the loan; 3) enforecement agencies are currently overwhelmed by defaults and delinqencies; and 4) perhaps the biggest reason of all, the direct link between lender and borrower that formerly was the standard model, was broken by bundling loans into securites with strange acronyms -- i.e., who a lender goes after is not easily establised. Feldstein is probably more right than wrong.

[piotr]

a: It was false, unreal. So Feldstein wants us to continue to live in make-believe land, as if that could possibly solve our problems.

The problem is not asset prices. The problem is the real economy. Pretending a little longer that Santa Claus exists isn't going to help.

In some sense, the notion of value is a notion of beliefs. In some Micronesian islands, stone age inhabitants were fashioning large stone disks which were valuable when the disks were transported from another island. Difficulty in transporting such disks in outrigger canoes were preventing inflation. However the islander arrived at their collected belief that nothing brings larger joy than a nice display of stone disks in the front of your hut, the system worked.

Until outsiders came, with bigger technological capability to fashion and transport disks, and with no inclination to hoards them.

I am afraid that the outsiders' belief in the inherent value of our real estate is badly shaken, and someone has to provide the loans. It is as if Micronesian accumulated a lot of loans with their stone disks as a collateral. Restoring the value of the disks that were purchased using no-down financing would require restoring faith among many parties, some of which were never that much into disks to begin with.

[Blissex]

Guys, Feldstein wants the government to make house prices continue to rise. Damn the market! Republican campaign donors are much better than the market. Feldstein however is not an idiot, and knows that save for hyperinflation nothing will stop house prices reverting to the mean. What his proposal really amounts to, like all the other brilliant "game the market" schemes is to give an opportunity for the Republican donor class members that have been too slow to unwind their positions onto some new greater fools and retire wealthy as they have deserve. If only ONeal, Cayne and Mozilo had had a bit more time they could have liquidated all their long positions and added to the several hundred millions they have already made.

[David Lloyd-Jones]

Nobody has ever said that Marty was not a cunning man. Still, for anyone in a relatively sound financial position, why are they going to trade an interest-tax-deducted for a naked cash loan? Nobody.

This leaves only flaky negative equity folks -- many of whom don't have enough taxable income for the tax shield to be interesting. For them, what-the-hell, any port in a storm. Problem is, the chance of their defaulting on the Feldstein side-loan are probably exactly the same, on average, as the chances of their defaulting on the mortgage.

This looks to me like trading a grenade with the pin pulled for a stick of dynamite with the fuse lit.